Press Releases

Shutterfly Announces Fourth Quarter and Full Year 2018 Financial Results

REDWOOD CITY, Calif.--(BUSINESS WIRE)--Feb. 5, 2019--
Shutterfly, Inc. (NASDAQ:SFLY), the leading retailer and manufacturing
platform dedicated to helping capture, preserve, and share life’s
important moments, today announced financial results for the fourth
quarter and full year ended December 31, 2018.

“2018 was a transformational year for Shutterfly, with the Lifetouch
acquisition almost doubling the size of the company, and ending 2018
with $2 billion of Non-GAAP net revenue,” said Christopher North,
President and Chief Executive Officer. “We articulated a unique value
proposition for our customers going forward: together, Shutterfly and
Lifetouch will help customers capture, preserve, and share the most
important memories in their lives, bringing Shutterfly’s strengths as
the leader in personalized photo-based products coupled with photo
storage, together with Lifetouch’s strengths as the leader in school and
family photography, to create the only end-to-end memory solution for
families. In doing so, we’ve significantly increased our potential to
create shareholder value. Looking forward, value creation will come from
continuing to drive growth in all three of our divisions, from
delivering substantial cost and revenue synergies from the Lifetouch
integration, and from returning capital to shareholders.”

“Our results in the fourth quarter were mixed, with strong performance
in Shutterfly Business Solutions and solid performance in Lifetouch
offset by disappointing performance in Shutterfly Consumer, which had
lower than expected growth of 1%.”

Please see the Company’s other two press releases issued today. The
first announces that the Board of Directors has formed a Strategic
Review Committee and retained a financial advisor, as it continues an
ongoing review of strategic and financial alternatives. The second
announces that Christopher North, President and CEO, will be stepping
down at the end of August 2019, and that the Board of Directors has
engaged an executive search firm to identify candidates to succeed him.

A reconciliation of GAAP to non-GAAP financial measures has been
provided in the financial statement tables included in this press
release. An explanation of these measures is also included below under
the heading “Non-GAAP Financial Information.”

Full Year 2018 Financial Highlights

GAAP net revenue was $1,962 million. Shutterfly Consumer segment net
revenue totaled $972 million, a 3% year-over-year decrease, as 3%
organic Shutterfly Brand growth was offset by lost revenue from the
brands and websites the Company shuttered in the 2017 platform
consolidation, and a year-over-year decline in the TinyPrints Boutique.
Lifetouch segment net revenue was $759 million. Shutterfly Business
Solutions segment net revenue totaled $231 million, a 19% year-over-year
increase. GAAP operating income totaled $115 million. Net income was $50
million or $1.45 per share.

In the fourth quarter of 2018, the Company further developed its
long-term plans to establish a single, next-generation manufacturing
platform serving Shutterfly Consumer, Lifetouch and SBS, an initiative
the Company refers to as Project Aspen. Project Aspen will yield a total
of approximately $130 million in cash savings over the next five years,
with annual run-rate savings from manufacturing operations of
approximately $35 million from 2022 onward. In addition, while Project
Aspen requires net investment in 2019, it will deliver net cash savings
in every year beginning in 2020. In the first phase of Project Aspen,
the Company will close four legacy Lifetouch facilities, including the
two sites previously announced, and two additional facility closures
announced today: Chico, California and Chattanooga, Tennessee, both of
which will close in the second half of 2019. The Company will also open
a new 237,000 square foot facility in Texas, in the first half of 2020,
which will serve both Lifetouch and Shutterfly. Further details about
Project Aspen will be shared as it progresses.

Adjusted EBITDA Target Update

The revenue and cost synergies from the Lifetouch acquisition are
expected to generate between $67 million and $75 million of incremental
annual Adjusted EBITDA in the next three years. The Company is updating
the previously communicated 2020 Adjusted EBITDA target of $450 million
for two reasons. First, the Company had lower-than-expected Shutterfly
Consumer growth in the fourth quarter of 2018 and has moderated
Shutterfly Consumer growth expectations in the near term. Second, while
Project Aspen is expected to generate greater run-rate savings, it will
also delay some of our 2020 cost synergies by one year. The Company now
expects to achieve between $400 million and $450 million of Adjusted
EBITDA in 2021 as follows:

2021 Adjusted EBITDA Range[1]

Low-end

High-end

FY19 Guidance range

$

315

$

340

Incremental manufacturing cost synergies (between 2019 and 2021)

24

24

Reduced integration costs (between 2019 and 2021)

18

18

357

382

Baseline revenue growth (2020 and 2021)[2]

19

35

Revenue synergies (2020 and 2021)[3]

25

33

2021 Adjusted EBITDA range

$

400

$

450

[1] The Company's 2021 Adjusted EBITDA outlook is
composed entirely of non-GAAP measures. The Company considers it
unreasonably difficult to reconcile its outlook to comparable GAAP
measures.

[2] Baseline revenue growth rate 3%-5% per year.

[3] Assumes $50 million - $65 million of revenue
synergies at a 50% contribution margin.

Capital Update

Cash, cash equivalents, and investments as of December 31, 2018 totaled
$566 million. In January 2019, as anticipated, the Company repaid $200
million of Term Loan B debt that was used to finance the acquisition of
Lifetouch. The Company ended January with cash, cash equivalents, and
investments of approximately $225 million, down from December 31, 2018,
driven by the debt repayment, and working capital used to pay vendors
and suppliers used in the fourth quarter.

The Board and management have also reviewed Shutterfly’s capital
structure, including appropriate leverage levels and potential share
buybacks. In the first quarter of 2019, the Company paid down $200
million of debt, consistent with its previous commitment to retain a BB
debt rating, while remaining compliant with its debt covenants. As part
of this review, the Company affirmed its objective of maintaining gross
leverage of 2.5-3.0x Adjusted EBITDA on an annual basis, and to return
cash in excess of our operating and financing needs to shareholders in
the form of share repurchases, within the parameters of appropriate cash
management that meets the needs of Shutterfly’s highly seasonal
business, where substantially all of the Company’s cash flow is
generated in the last four months of the year. Currently, management
believes it will be in position to begin executing on a capital return
plan during the fourth quarter of 2019.

Impact of New Lease Accounting Standard

The new lease accounting standard, ASC 842 (Leases) is effective for the
Company on January 1, 2019. The Company is finalizing the evaluation of
the effects to the Company’s Consolidated Financial Statements and
disclosure. The Company expects the most significant impact relates to
the leases designated as operating leases that will be recognized as
right-of-use assets and corresponding lease liabilities on its
Consolidated Balance Sheets upon adoption. Additionally, the Company
derecognized its build-to-suit leases upon adoption of ASC 842. Post
adoption of ASC 842, the Company's build-to-suit leases will be
accounted for as operating leases and will be recorded as right-of-use
assets and lease liabilities, with lease expense recorded in the income
statement. Prior to adoption of ASC 842, the Company’s build-to-suit
leases were recorded as assets and financing obligations, with
depreciation expense and interest expense recorded in the income
statement, respectively. As a result, the Company expects that its
Adjusted EBITDA in 2019 will be negatively impacted by approximately
$5.0 million from the change in accounting treatment related to the
Company’s build-to-suit leases.

Business Outlook[1][2]

Full Year 2019:

Net revenue to range from $2,130 million to $2,210 million

Shutterfly Consumer net revenue to range from $975 million to $1,025
million

Lifetouch net revenue to range from $915 million to $935 million

SBS net revenue to range from $240 million to $250 million

Gross profit margin to range from 51.4% to 51.7% of net revenue

Operating income to range from $76 million to $101 million

Effective tax rate of 28.0%

Net income per share to range from $0.55 to $1.06

Weighted average shares of approximately 34.8 million

Adjusted EBITDA to range from $315 million to $340 million

Capital expenditures to range from $125 million to $130 million

First Quarter 2019:

Net revenue to range from $317 million to $328 million

Shutterfly Consumer net revenue to range from $146 million to $150
million

Lifetouch net revenue to range from $126 million to $130 million

SBS net revenue to range from $45 million to $48 million

Gross profit margin to range from 35.8% to 36.7% of net revenue

Operating loss to range from $102 million to $107 million

Effective tax rate of 27.0%

Net loss per share to range from $2.49 to $2.59

Weighted average shares of approximately 33.9 million

Adjusted EBITDA loss to range from $43 million to $48 million

[1] Excludes any costs related to executive transition, the
strategic review, the facility closures in 2019, and any non-recurring
charges related to the $200 million debt repayment made in January 2019.
It also excludes any proceeds from the sale of existing facilities.[2]
The Company's business outlook is composed entirely of non-GAAP
measures. The Company considers it unreasonably difficult to reconcile
its outlook to comparable GAAP measures.

Notes to the Fourth Quarter and Full Year 2018 Financial Results and
Operating Metrics and 2019 Business Outlook

The Company expanded segment reporting in the second quarter of 2018,
which now includes segment margin. Segment reporting continues to report
net revenue and cost of net revenue, consistent with previous reporting,
but now it also includes technology and development, sales and
marketing, and credit card fees, arriving at a margin for the segment.
The margin of the Company's three segments compares to non-GAAP
operating income by adding corporate expenses, amortization of
intangible assets, stock-based compensation, and other non-recurring
items including restructuring and acquisition-related charges.

Shutterfly Consumer segment includes sales from the Shutterfly brand,
the Tiny Prints boutique and BorrowLenses, and are derived from the sale
of a variety of products such as, professionally-bound photo books,
cards and stationery, custom home décor products and unique photo gifts,
calendars and prints, and the related shipping revenue, as well as
rental revenue from the BorrowLenses brand. Consumer also includes
revenue from advertising displayed on the Company’s website.

Lifetouch segment includes net revenue from professional photography
services for schools, preschools and churches, as well as retail studios
operated by Lifetouch under the JCPenney Portrait brand.

Shutterfly Business Solutions ("SBS") segment includes net revenue from
personalized direct marketing and other end-consumer communications as
well as just-in-time, inventory-free printing for the Company's business
customers.

Average Order Value ("AOV") is defined as total net revenue (excluding
Lifetouch and SBS) divided by total orders.

The financial guidance herein replaces any of the Company’s previously
issued financial guidance which should no longer be relied upon.

Fourth Quarter Conference Call

Management will review the fourth quarter and full year 2018 financial
results and its expectations for the first quarter and full year 2019 on
a conference call on Tuesday, February 5, 2019 at 2:00 p.m. Pacific Time
(5:00 p.m. Eastern Time). To listen to the call and view the
accompanying slides, please visit http://www.shutterflyinc.com.
In the Investor Relations area, click on the link provided for the
webcast, or dial (844) 763-8274 or (412) 717-9224, and ask to be to be
joined into the Shutterfly call. The webcast will be archived and
available at http://www.shutterflyinc.com
in the Investor Relations section. A replay of the conference call will
be available through Tuesday, February, 19, 2019. To hear the replay,
please dial (877) 344-7529 or (412) 317-0088 and enter access code
10127959.

Non-GAAP Financial Information

To supplement the Company’s consolidated financial statements, which are
prepared and presented in accordance with U.S. generally accepted
accounting principles (GAAP), the Company uses certain non-GAAP
financial measures. Tables are provided at the end of this press release
that reconcile the non-GAAP financial measures that the Company uses to
the most directly comparable financial measures prepared in accordance
with GAAP. These non-GAAP financial measures include non-GAAP net
revenue, non-GAAP Lifetouch segment net revenue, normalized operating
income (loss), net income (loss), net income (loss) per share and
adjusted EBITDA. The method the Company uses to produce non-GAAP
financial measures is not computed according to GAAP and may differ from
methods used by other companies.

The Company believes that these non-GAAP measures provide useful
information about the Company's core operating results and thus are
appropriate to enhance the overall understanding of the Company's past
financial performance and its prospects for the future. These
adjustments to the Company's GAAP results are made with the intent of
providing both management and investors a more complete understanding of
the Company's underlying operational results and trends and performance.
Management uses these non-GAAP measures to evaluate the Company's
financial results, develop budgets, manage expenditures, and determine
employee compensation. The presentation of additional information is not
meant to be considered in isolation or as a substitute for or superior
to gross margins, net revenue, operating income (loss), net income
(loss), or net income (loss) per share determined in accordance with
GAAP. For more information, please see Shutterfly'sSecurities and
Exchange Commission (“SEC”) filings, including the most recent Form 10-K
and Form 10-Q, which are available on the SEC's website at www.sec.gov.

The Company has provided a reconciliation of each non-GAAP financial
measure to the most directly comparable GAAP financial measure, where
possible, except that the Company has not reconciled its first quarter
and full year 2019 guidance, and its updated 2021 non-GAAP Adjusted
EBITDA bridge to comparable GAAP measures at this stage of the process
because it is unreasonably difficult to provide guidance for stock-based
compensation expense; capitalization and amortization of internal-use
software; costs related to executive transition, the strategic review,
the facility closures in 2019, any non-recurring charges related to the
$200 million debt repayment made in January 2019; and proceeds from the
sale of existing facilities, which are reconciling items between GAAP
measures and non-GAAP measures. The factors that may impact future
stock-based compensation expense; capitalization and amortization of
internal-use software; costs related to executive transition; the
strategic review; the facility closures in 2019; and the proceeds from
the sale of existing facilities are out of the Company's control and/or
cannot be reasonably predicted, and therefore the Company is unable to
provide such guidance without unreasonable effort. These factors include
the Company's market capitalization and related volatility of its stock
price; its inability to project the cost or scope of internally produced
software; its inability to estimate the charges related to the facility
closures in 2019 and the proceeds from the sale of existing facilities;
its ability to attract new management personnel; and the lack of
assurance that the review of strategic alternatives will result in a
transaction or other outcome.

Notice Regarding Forward-Looking Statements

This media release contains "forward-looking" statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that
involve risks and uncertainties. These forward-looking statements
include statements regarding expected cash flow generation in each of
the Company's three segments; the Company’s belief it can offer a
complete memory solution; the Company's expectations of opportunities to
broaden its value proposition to customers; the Company's expectations
to create shareholder value; the Company’s expectations of growing all
three divisions and returning capital to shareholders; the Company's
expectations of maintaining a certain gross leverage ratio; the
Company’s expectations as to the timing of meeting its Adjusted EBITDA
target; the Company’s expectations as to the revenues and cost synergies
from the Lifetouch acquisition; expectations around the consolidation of
production facilities including run-rate savings; expectations around
the impact of ASC 842; and the Company's business outlook for the first
quarter of 2019 and full year 2019. You can identify these statements by
the use of terminology such as “guidance”, “believe”, “expect”, “will”,
“should”, “could”, “estimate”, “anticipate” or similar forward-looking
terms. You should not rely on these forward-looking statements as they
involve risks and uncertainties that may cause actual results to vary
materially from the forward-looking statements. Factors that might
contribute to such differences include, among others, decreased consumer
discretionary spending as a result of general economic conditions; the
Company's ability to expand its customer base and increase sales to
existing customers; the Company's ability to meet production
requirements; the Company’s ability to attract and retain management and
other personnel; the Company's ability to retain and hire necessary
employees, including seasonal personnel, and appropriately staff its
operations; the impact of seasonality on the Company's business; the
Company's ability to develop innovative, new products and services on a
timely and cost-effective basis; failure to realize the anticipated
benefits of the Company's 2017 restructuring activities or of the
Lifetouch acquisition; recent and ongoing restructuring activities
(including but not limited to those relating to manufacturing
consolidation, Lifetouch field operations and the Company's single
platform migration); any indications of interest received by Shutterfly;
consumer acceptance of the Company's products and services; the
Company's ability to develop additional adjacent lines of business;
unforeseen changes in expense levels; refining our promotional
strategies; competition and the pricing strategies of the Company's
competitors, which could lead to pricing pressure; the retention of
Lifetouch employees and the Company's ability to successfully integrate
the Lifetouch businesses; risks inherent in the achievement of
anticipated synergies and the timing thereof; and general economic
conditions and changes in laws and regulations. For more information
regarding the risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in these
forward-looking statements, as well as risks relating to the Company's
business in general, the Company refers you to the “Risk Factors”
section of its SEC filings, including the Company's most recent Form
10-K and 10-Q, which are available on the SEC’s website at www.sec.gov.
These forward-looking statements are based on current expectations and
the Company assumes no obligation to update this information.

About Shutterfly, Inc.

Shutterfly, Inc. is the leading retailer and manufacturing platform for
personalized products and communications. Founded in 1999, Shutterfly,
Inc. has three divisions: Shutterfly Consumer, Lifetouch, and Shutterfly
Business Solutions. Shutterfly Consumer and Lifetouch help consumers
capture, preserve, and share life’s important moments through
professional and personal photography, and personalized products. The
Shutterfly brand brings photos to life in photo books, gifts, home
décor, and cards and stationery. Lifetouch is the national leader in
school photography, built on the enduring tradition of “Picture Day”,
and also serves families through portrait studios and other
partnerships. Shutterfly Business Solutions delivers digital printing
services that enable efficient and effective customer engagement through
personalized communications. For more information about Shutterfly, Inc.
(Nasdaq: SFLY), visit www.shutterflyinc.com.

Appendix 1.1

Shutterfly, Inc.

Consolidated Statements of Operations - GAAP

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2018

2017

2018

2017

Net revenue

$

949,966

$

593,755

$

1,961,820

$

1,190,202

Cost of net revenue

377,562

254,218

961,575

619,650

Restructuring

—

—

—

1,475

Gross profit

572,404

339,537

1,000,245

569,077

Operating expenses:

Technology and development

49,342

43,415

177,001

168,383

Sales and marketing

202,095

78,503

505,833

197,708

General and administrative[1]

60,290

38,597

197,340

117,797

Capital lease termination

—

—

—

8,098

Restructuring[2]

1,667

—

4,618

15,491

Total operating expenses

313,394

160,515

884,792

507,477

Income from operations

259,010

179,022

115,453

61,600

Interest expense

(17,176)

(9,219)

(61,239)

(27,836)

Interest and other income, net

1,278

794

5,444

1,481

Income before income taxes

243,112

170,597

59,658

35,245

Provision for income taxes

(65,496)

(58,873)

(9,262)

(5,160)

Net income

$

177,616

$

111,724

$

50,396

$

30,085

Net income per share:

Basic

$

5.28

$

3.45

$

1.52

$

0.91

Diluted

$

5.19

$

3.37

$

1.45

$

0.88

Weighted average shares outstanding:

Basic

33,614

32,372

33,258

33,113

Diluted

34,218

33,114

34,832

34,106

Stock-based compensation is allocated as follows:

Cost of net revenue

$

973

$

1,055

$

3,824

$

4,339

Technology and development

2,445

2,391

9,990

9,778

Sales and marketing

3,287

3,211

12,790

12,229

General and administrative

5,695

4,206

21,117

17,227

Restructuring

—

—

—

814

$

12,400

$

10,863

$

47,721

$

44,387

Depreciation and amortization is allocated as follows:

Cost of net revenue

$

25,645

$

15,682

$

87,563

$

60,415

Technology and development

6,881

6,935

26,721

28,457

Sales and marketing

9,786

2,122

31,002

10,393

General and administrative

1,571

985

5,841

4,597

Restructuring

805

—

805

5,999

$

44,688

$

25,724

$

151,932

$

109,861

[1] The General and administrative expenses of $60
million and $197 million for the three and twelve months ended
December 31, 2018, respectively, include $0.6 million and $16
million, respectively, of acquisition-related charges.

[2] The exit of iMemories business in the second quarter
of 2018 and the planned closure of two Lifetouch facilities in the
fourth quarter of 2018 resulted in restructuring charges of $1.7
million and $4.6 million in the three and twelve months ended
December 31, 2018, respectively.

Stock-based compensation capitalized with software and website
development costs

1,345

1,373

Property and equipment acquired under capital leases

5,611

19,145

Appendix 1.4

Shutterfly, Inc.

Shutterfly Consumer Metrics Disclosure

(Unaudited)

Three Months Ended

Twelve Month Ended

December 31,

December 31,

2018

2017

2018

2017

Shutterfly Consumer Metrics

Customers [1]

6,066,885

6,110,833

9,766,578

10,048,431

year-over-year change

(1)

%

(3)

%

Orders

9,769,375

10,463,752

23,625,789

26,328,121

year-over-year change

(7)

%

(10)

%

Average order value [2]

$54.03

$49.87

$41.13

$37.87

year-over-year change

8

%

9

%

[1] An active customer is defined as one that has
transacted in the last trailing twelve months.

[2] Average order value excludes Lifetouch and SBS
revenue.

Appendix 1.5

Shutterfly, Inc.

Shutterfly Consumer Net Revenue by Brand

(In thousands)

(Unaudited)

Three Months Ended

Year Ended

Mar. 31,

Jun. 30,

Sep. 30,

Dec. 31,

Mar. 31,

Jun. 30,

Sep. 30,

Dec. 31,

Dec. 31,

Dec. 31,

2017

2017

2017

2017

2018

2018

2018

2018

2017

2018

Shutterfly Consumer net revenue

Shutterfly Brand Core

$

97,368

$

104,779

$

87,398

$

372,136

$

114,087

$

116,808

$

86,237

$

372,567

$

661,682

$

689,700

Shutterfly Brand PGHD

26,535

35,129

28,485

92,411

28,577

37,373

29,227

$

105,966

182,560

201,143

Tiny Prints Boutique

—

—

1,942

48,932

2,103

1,397

1,490

40,566

50,874

45,556

Tiny Prints [1]

10,465

12,917

—

—

—

—

—

—

23,382

—

Wedding Paper Divas [2]

14,290

11,365

8,523

—

—

—

—

—

34,178

—

MyPublisher [3]

4,936

6,056

—

—

—

—

—

—

10,992

—

Other

7,051

8,844

9,070

8,330

7,292

9,425

9,934

8,779

33,295

35,430

Total

$

160,645

$

179,090

$

135,418

$

521,809

$

152,059

$

165,003

$

126,888

$

527,878

$

996,963

$

971,829

[1] Tiny Prints website shut down on June 28, 2017.

[2] Wedding Paper Divas website shut down on September
13, 2017.

[3] MyPublisher website shut down on May 15, 2017.

Appendix 2.1

Shutterfly, Inc.

Segment Disclosure

(In thousands)

(Unaudited)

The Company expanded segment reporting, which now includes segment
margin. Segment reporting continues to report net revenue and cost
of net revenue, consistent with previous reporting, but now it also
includes technology and development, sales and marketing, and credit
card fees, arriving at a margin for the segment. The margin of the
Company's three segments compares to non-GAAP operating income by
adding corporate expenses, amortization of intangible assets,
stock-based compensation, and other non-recurring items including
restructuring and acquisition-related charges.

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2018

2017

2018

2017

Shutterfly Consumer:

Net revenue

$

527,878

$

521,809

$

971,829

$

996,963

Cost of net revenue

200,285

193,320

452,226

456,665

Technology and development

32,740

36,019

124,670

140,698

Sales and marketing

78,943

71,732

168,442

170,687

Credit card fees

12,997

12,936

25,072

25,645

Margin[1]

$

202,913

$

207,802

$

201,419

$

203,268

Margin %

38.4 %

39.8 %

20.7 %

20.4 %

Lifetouch[2]:

Net revenue[3]

$

349,736

$

—

$

798,718

$

—

Cost of net revenue[4]

114,131

—

299,467

—

Technology and development

7,461

—

21,711

—

Sales and marketing

108,925

—

288,578

—

Credit card fees

4,470

—

8,951

—

Margin[1]

$

114,749

$

—

$

180,011

$

—

Margin %

32.8 %

— %

22.5 %

— %

Shutterfly Business Solutions:

Net revenue

$

74,358

$

71,946

$

230,588

$

193,239

Cost of net revenue

59,899

58,812

187,392

154,068

Technology and development

3,430

5,006

13,614

17,907

Sales and marketing

1,525

1,444

6,067

4,476

Margin[1]

$

9,504

$

6,684

$

23,515

$

16,788

Margin %

12.8 %

9.3 %

10.2 %

8.7 %

Consolidated Segments:

Net revenue[3]

$

951,972

$

593,755

$

2,001,135

$

1,190,202

Cost of net revenue[4]

374,315

252,132

939,085

610,733

Technology and development

43,631

41,025

159,995

158,605

Sales and marketing

189,393

73,176

463,087

175,163

Credit card fees

17,467

12,936

34,023

25,645

Margin[1]

$

327,166

$

214,486

$

404,945

$

220,056

Margin %

34.4 %

36.1 %

20.2 %

18.5 %

[1] The margins reported reflect only costs that are
directly attributable or allocable to a specific segment and exclude
corporate expenses, amortization of intangible assets, stock-based
compensation and other non-recurring charges.

[2] The Company acquired Lifetouch on April 2, 2018.

[3] Yearbook sales and collections for the Lifetouch
segment are made throughout the school year, whereas yearbooks are
typically delivered toward the end of the school year in the second
quarter of the fiscal year. Business combination accounting
principles require the Company to record the assumed deferred
revenue at fair value on the acquisition date measured based on the
cost to manufacture and deliver the yearbooks, plus a profit margin.
Segment reporting includes this purchase accounting adjustment which
primarily relates to yearbook sales in net revenue for the Lifetouch
segment.

[4] Business combination accounting principles require
the Company to measure acquired inventory at fair value. The fair
value of inventory reflects the acquired company’s cost of
manufacturing plus a portion of the expected profit margin. Segment
reporting excludes this purchase accounting adjustment from cost of
net revenue for the Lifetouch segment.

The following table reconciles operating segment margin to total
operating income, operating segment net revenue to total net revenue,
and operating segment cost of net revenue to total cost of net revenue:

Three Months Ended

Twelve Months Ended

December 31,

December 31,

2018

2017

2018

2017

Total margin for operating segments

$

327,166

$

214,486

$

404,945

$

220,056

Purchase accounting deferred revenue adjustment[1]

(2,006)

—

(39,315)

—

Purchase accounting inventory adjustment[2]

—

—

(10,931)

—

Purchase accounting deferred rent adjustment[3]

(292)

—

(292)

—

Corporate expenses[4]

(38,519)

(21,454)

(130,642)

(74,903)

Amortization of intangible assets

(12,700)

(3,147)

(40,424)

(14,916)

Stock-based compensation for operating segments

(12,400)

(10,863)

(47,721)

(43,573)

Restructuring

(1,667)

—

(4,618)

(16,966)

Acquisition-related charges

(572)

—

(15,549)

—

Capital lease termination

—

—

—

(8,098)

Operating income

$

259,010

$

179,022

$

115,453

$

61,600

Operating margin

27.3 %

30.2 %

5.9 %

5.2 %

Total net revenue for all operating segments

$

951,972

$

593,755

$

2,001,135

$

1,190,202

Purchase accounting deferred revenue adjustment[1]

(2,006)

—

(39,315)

—

Total net revenue

$

949,966

$

593,755

$

1,961,820

$

1,190,202

Total cost of net revenue for all operating segments

$

374,315

$

252,132

$

939,085

$

610,733

Purchase accounting inventory adjustment[2]

—

—

10,931

—

Stock-based compensation for cost of net revenue

973

1,055

3,824

4,339

Amortization of intangible assets for cost of net revenue

2,274

1,031

7,735

4,578

Total cost of net revenue

$

377,562

$

254,218

$

961,575

$

619,650

[1] Yearbook sales and collections for the Lifetouch
segment are made throughout the school year, whereas yearbooks are
typically delivered toward the end of the school year in the second
quarter of the fiscal year. Business combination accounting
principles require the Company to record the assumed deferred
revenue at fair value on the acquisition date measured based on the
cost to manufacture and deliver the yearbooks, plus a profit margin.
Segment reporting includes this purchase accounting adjustment which
primarily relates to yearbook sales in net revenue for the Lifetouch
segment.

[2] Business combination accounting principles require
the Company to measure acquired inventory at fair value. The fair
value of inventory reflects the acquired company’s cost of
manufacturing plus a portion of the expected profit margin. Segment
reporting excludes this purchase accounting adjustment from cost of
net revenue for the Lifetouch segment.

[4] Corporate expenses include activities that are not
directly attributable or allocable to a specific segment. This
category consists primarily of expenses related to certain functions
performed at the corporate level such as non-manufacturing
facilities, human resources, finance and accounting, legal,
information technology, integration, etc.

Appendix 3.1

Shutterfly, Inc.

Reconciliation of Non-GAAP Financial Measures

(In thousands)

(Unaudited)

Three Months Ended

Three Months Ended

December 31, 2018

December 31, 2018

GAAP Income

Non-GAAP

Non-recurring

Normalized

Statement

Adjustments

Adjustments

Non-GAAP

Net revenue:

Shutterfly Consumer

$

527,878

$

527,878

Lifetouch

347,730

2,006

[1]

349,736

Shutterfly Business Solutions

74,358

74,358

Total net revenue

949,966

2,006

951,972

Cost of net revenue

377,562

377,562

Gross profit

572,404

2,006

574,410

Gross profit margin

60.3%

60.3%

Operating expenses:

Technology and development

49,342

49,342

Sales and marketing

202,095

(217)

[5]

201,878

General and administrative

60,290

(75)

[5]

(572)

[3]

59,643

Restructuring

1,667

(1,667)

—

Total operating expenses

313,394

(292)

(2,239)

310,863

Operating income

259,010

2,298

2,239

263,547

Operating margin

27.3%

27.7%

Interest expense

(17,176)

(17,176)

Interest and other income, net

1,278

1,278

Income before income taxes

243,112

2,298

2,239

247,649

Provision for income taxes

(65,496)

(60,446)

Net income

$

177,616

$

187,203

Net income per share:

Basic

$

5.28

$

5.57

Diluted

$

5.19

$

5.47

Weighted-average shares outstanding:

Basic

33,614

33,614

Diluted

34,218

34,218

Operating income

$

259,010

$

263,547

Stock-based compensation

12,400

12,400

Amortization of intangible assets

12,700

12,700

Depreciation

31,988

(805)

31,183

Adjusted EBITDA

$

319,830

Adjusted EBITDA margin

33.6%

Twelve Months Ended

Twelve Months Ended

December 31, 2018

December 31, 2018

GAAP Income

Non-GAAP

Non-recurring

Normalized

Statement

Adjustments

Adjustments

Non-GAAP

Net revenue:

Shutterfly Consumer

$

971,829

$

971,829

Lifetouch

759,403

39,315

[1]

798,718

Shutterfly Business Solutions

230,588

230,588

Total net revenue

1,961,820

39,315

2,001,135

Cost of net revenue

961,575

(10,931)

[2]

950,644

Gross profit

1,000,245

50,246

1,050,491

Gross profit margin

51.0%

52.5%

Operating expenses:

Technology and development

177,001

177,001

Sales and marketing

505,833

(217)

[5]

505,616

General and administrative

197,340

(75)

[5]

(15,549)

[3]

181,716

Restructuring

4,618

(4,618)

[4]

—

Total operating expenses

884,792

(292)

(20,167)

864,333

Operating income

115,453

50,538

20,167

186,158

Operating margin

5.9%

9.3%

Interest expense

(61,239)

(61,239)

Interest and other income, net

5,444

5,444

Income before income taxes

59,658

50,538

20,167

130,363

Provision for income taxes

(9,262)

(24,172)

Net income

$

50,396

$

106,191

Net income per share - basic

Basic

$

1.52

$

3.19

Diluted

$

1.45

$

3.05

Weighted-average shares outstanding:

Basic

33,258

33,258

Diluted

34,832

34,832

Operating income

115,453

186,158

Stock-based compensation

47,721

47,721

Amortization of intangible assets

40,424

40,424

Depreciation

111,508

(805)

110,703

Adjusted EBITDA

$

385,006

Adjusted EBITDA margin

19.2%

[1] Yearbook sales and collections for the Lifetouch
segment are made throughout the school year, whereas yearbooks are
typically delivered toward the end of the school year in the second
quarter of the fiscal year. Business combination accounting
principles require the Company to record the assumed deferred
revenue at fair value on the acquisition date measured based on the
cost to manufacture and deliver the yearbooks, plus a profit margin.
Segment reporting includes this purchase accounting adjustment which
primarily relates to yearbook sales in net revenue for the Lifetouch
segment.

[2] Business combination accounting principles require
the Company to measure acquired inventory at fair value. The fair
value of inventory reflects the acquired company’s cost of
manufacturing plus a portion of the expected profit margin. Segment
reporting excludes this purchase accounting adjustment from cost of
net revenue for the Lifetouch segment.

[3] Acquisition-related charges for Lifetouch acquisition.

[4] Restructuring charge related to the exit of iMemories
and the planned closure of two Lifetouch facilities.

[1] During the third quarter of 2018, the Company
identified certain amounts attributable to the repayment of accreted
interest on its convertible senior notes that were misclassified
within the statement of cash flows. This misclassification resulted
in a $64 million understatement of net cash used in operating
activities with a corresponding understatement of cash provided by
financing activities for the second quarter of 2018. The quarterly
amounts in the above table have been revised to appropriately
reflect such repayment of accreted interest in cash used in
operating activities during the second quarter of 2018.

Appendix 5.1

Shutterfly, Inc.

Forward-Looking Guidance for Non-GAAP Financial Measures

(In millions, except per share amounts)

(Unaudited)

Forward-Looking Guidance[1][2]

Three Months Ending

Twelve Months Ending

March 31, 2019

December 31, 2019

Low

High

Low

High

Net revenue

$317

$328

$2,130

$2,210

Shutterfly Consumer net revenue

$146

$150

$975

$1,025

Lifetouch net revenue

$126

$130

$915

$935

SBS net revenue

$45

$48

$240

$250

Gross profit

$114

$120

$1,095

$1,143

Gross profit margin

35.8

%

36.7

%

51.4

%

51.7

%

Operating income (loss)

($107)

($102)

$76

$101

Operating margin

(33.7)

%

(31.1)

%

3.6

%

4.6

%

Operating income (loss)

($107)

($102)

$76

$101

Stock-based compensation

$13

$13

$54

$54

Amortization of intangible assets

$13

$13

$51

$51

Depreciation

$33

$33

$133

$133

Adjusted EBITDA

($48)

($43)

$315

$340

Adjusted EBITDA margin

(15.1)

%

(13.1)

%

14.8

%

15.4

%

Capital Expenditures

—

—

$125

$130

Capital expenditures as % of net revenue

—

—

5.9

%

5.9

%

Tax rate

27.0

%

27.0

%

28.0

%

28.0

%

Net income (loss) per share

Basic

($2.59)

($2.49)

—

—

Diluted

—

—

$0.55

$1.06

Weighted average shares

Basic

33.9

33.9

—

—

Diluted

—

—

34.8

34.8

[1] Excludes any costs related to executive transition,
the strategic review, the facility closures in 2019, and any
non-recurring charges related to the $200 million debt repayment
made in January 2019. It also excludes any proceeds from the sale of
existing facilities.

[2] The Company's business outlook is composed entirely
of non-GAAP measures. The Company considers it unreasonably
difficult to reconcile its outlook to comparable GAAP measures.